Cannot be used as a basis for income tax calculations

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Cannot be used as a basis for income tax calculations. Sometimes the distinction between fixed and variable costs is arbitrary.
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488 Answer: Question 1.2-Great Heart 1. The clinic should use a job costing system since the clinic has a wide variety of different services. The job costing system can accumulate costs to a specific job, which better reflect the specific service each patient received. 2. Predetermined overhead rate: $162,500/10,000=$16.25 Applied overhead: $16.25*12,190= $198,088<$296,047, so overhead is under applied 3. The predetermined overhead rate is usually based on overall level of activity without considering the relationships between costs and their drivers. So apply overhead based on this rate usually is not accurate enough to provide management meaningful data to assist them to achieve cost effectiveness. The predetermined overhead rate is an estimated rate, applied overhead maybe quite different from the actual cost. 4. The applied overhead is likely to differ from actual overhead cost incurred for the period. Applied overhead can be higher or lower than the actual overhead because the applied overhead is based on the predetermined overhead rate, which is calculated by using budgeted overhead costs divide estimated activity level of the chosen cost drivers, times the actual level of cost drivers. 5. Since the overhead variance is deemed material, so the under-applied overhead amount usually is prorated among WIP inventory, finished goods inventory, and COGS accounts. 6. ABC assigns overhead costs to products or services using cause-and-effect criteria with several cost pools. The use of both volume-based and nonvolume-based cost drivers is determined according to the consumption of resources in performing various activities. ABC helps clinic assign overhead costs more accurately and manage costs more efficiently to achieve its strategy. Identify activities and cost drivers Select the cost allocation bases to use for allocating overhead cost Identify the overhead costs associated with each cost allocation base on the basis of cause and effect relationship Calculate the rate per unit of each cost allocation base Calculate overhead costs allocated to the products
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489 Answer to Part 2 Practice Questions Answer: Question 2.1-FSL Industries 1. Since FSL requires the use of $9 million, it will have to borrow $10 million ($9 million / (1-10%)). This will result in 10% of the loan principle ($1 million) being used to satisfy the compensating balance. Annual interest would be 5% of the total loan of $10 million or $500,000. 2. a. The semi-annual interest cost of the term loan would be $9million*(7%/2)=$315,000. The annual interest cost would then be $315,000*2=$630,000. b. Advantages of this loan over the short term loan include: The loan would be outstanding for 10 years and would not have to be renegotiated each year. Since the need for these funds is quite long due to the need to carry the spare parts inventory, this is an advantage The interest rate is fixed for 10 years, eliminating interest rate risk which is inherent in the short term loan Disadvantages of such a loan include: FSL would not be able to take advantage of falling interest rates in the future.
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